Interesting webpage on AA

[pb4uski]

I saw this interesting webpage on Vanguard's AA at different ages. First time I had seen it so I figured I would post it.

https://advisors.vanguard.com/VGApp/iip/site/advisor/investments/portfoliodetails?fundId=0682

 

[Dawg52]

According to the charts, someone my age(58) should have roughly 70% in stocks. Seems pretty aggressive to me. I have less than half that allocated to stocks. My allocation is closer to the 74 and over bracket. Oh well....I feel old so I invest like an old guy.

 

[growing_older]

Or, you've already won the game to reach FI and don't need the additional risk. It's one thing to see that stocks have higher long term results, but it's quite another to ride the roller coaster up and down, accepting the possibility that it might be down when you really really needed it to be up.

 

[Huston55]

According to the charts, someone my age(58) should have roughly 70% in stocks. Seems pretty aggressive to me. I have less than half that allocated to stocks. My allocation is closer to the 74 and over bracket. Oh well....I feel old so I invest like an old guy.

70% stocks IF you're retiring at 65, right? If you're retired or retiring within the year, looks like ~43% stock allocation. Still more than you have but, closer.

What's missing from this is an accounting for guaranteed income streams, and how that should affect AA. For example, some would say that guaranteed, COLAd income streams should be counted as part of one's bond allocation. I'm not sure I'm in that camp yet - need to study it more. But, in my case, it dramatically changes my AA (from~ 65/35 to ~35/65).

 

[ERD50]

Or, you've already won the game to reach FI and don't need the additional risk. ...

An AA heavily weighted with fixed income could be the risky position.

FIRECALC shows that lots of fixed income reduces the success rate. How do you define 'risk'?

-ERD50

 

[rbmrtn]

Or, you've already won the game to reach FI and don't need the additional risk. It's one thing to see that stocks have higher long term results, but it's quite another to ride the roller coaster up and down, accepting the possibility that it might be down when you really really needed it to be up.

+1. I think they are assuming retirement at age 65 and would still be in accumulation phase until then.

 

[pb4uski]

Click on the View Chart by Age - it defines AA in terms of years before, at or after retirement. The target AA at retirement is 65 stocks/35 bonds.

Pretty mainstream but perhaps a bit more stocks than this group at retirement. Actually pretty close to my AA of 60/40.

For younger folks (20-40) their target is 90/10 and 70% domestic/30% international within equities.

 

[pb4uski]

Or, you've already won the game to reach FI and don't need the additional risk. It's one thing to see that stocks have higher long term results, but it's quite another to ride the roller coaster up and down, accepting the possibility that it might be down when you really really needed it to be up.

I think it depends. If you have won the game the remaining risk is inflation. If you have won the game bigtime, then perhaps you could dial down the risk, but if you have just won the game then you need equities to provide a hedge against inflation. Interesting that their AA for someone who is 7+ years into retirement is still 30/70, presumably because stocks act as a hedge against inflation.

 

[Midpack]

Interesting chart (by age) and I like that they've split out TIPS, foreign equity and cash, many recommendations just show equity:bond pie charts by age. But there's nothing wrong with varying what we do as individuals with a 10% plus/minus adjustment in equity/bonds (or more) depending on risk tolerance, age/longevity, how FI you are/not, etc.

 

[foxfirev5]

A long time ago I realized that a high equity stake wasn't my style. I really boosted the savings and got the balances up there. ( The high interest rates of those days didn't hurt). My 45/40/15 equity/bond/cash AA also let me sleep through the dips and crashes and stay the course.

 

[rbmrtn]

A few years ago I read an article from Paul Merriman at fundadvice on portfolio risk.

FundAdvice.com - The perfect portfolio

Figure 7 is a table showing returns for various % stock allocation. With 30-40% stock you can capture most of the return and significantly reduce drawdown risk.

 

[Dawg52]

A few years ago I read an article from Paul Merriman at fundadvice on portfolio risk.

FundAdvice.com - The perfect portfolio

Figure 7 is a table showing returns for various % stock allocation. With 30-40% stock you can capture most of the return and significantly reduce drawdown risk.

From the link(1970-2008).......

Let’s start with the assumption that you are comfortable with the very minimal risk of the all-fixed-income portfolio of T-notes, but that you are not satisfied with the 8.3 percent compound return. Let's also assume that you could be satisfied with the 9.5 percent return of the all-equity portfolio, but that you’re not comfortable with the risks.

The question is: Where do you fit in between?

If anyone can guarantee the next 38 years to be anything like the previous, give me the T-Bill portfolio for comfort sleeping. I'm closer to the 30/70 model to hedge my bets.

 

[Spanky]

The question is: Where do you fit in between?

for us: 50/50 mix should suffice.

 

[Lsbcal]

This is a good starting point for thinking through one's AA. This is the first time I've seen VG do such a nice chart (with good color too) and tables on AA.

Anyway, one needs to look at their full picture which includes: expenses, pensions, SS, when one might downsize the house, life expectancy, the range and order of equity/bond returns, etc. This sort of sounds like FIRECalc to me. What do you think?

P.S. The chart is pretty close to my AA at 65.

 

[ERD50]

....

If anyone can guarantee the next 38 years to be anything like the previous, give me the T-Bill portfolio for comfort sleeping. I'm closer to the 30/70 model to hedge my bets.

I don't get this at all - how could a T-Bill portfolio make you sleep well?


FIRECALC - 3.5% WR, 35 Years, default 75/25 - 99.1% success rate.

FIRECALC - 3.5% WR, 35 Years, 100% 5 Year Treasuries - 50.9% success rate.

FIRECALC - 3.5% WR, 35 Years, 100% 30 Year Treasuries - 41.5% success rate.

If you use the "Investigate changing my allocation" tab entry, you'll find success rates are pretty flat between 40/60 EQ/Fixed and 100/0 EQ/Fixed. Success drops off pretty sharply below 40/60. I consider 'hedging my bets' to stay near the middle of that range ~ 70/30.

-ERD50

 

[Dawg52]

I don't get this at all - how could a T-Bill portfolio make you sleep well?


FIRECALC - 3.5% WR, 35 Years, default 75/25 - 99.1% success rate.

FIRECALC - 3.5% WR, 35 Years, 100% 5 Year Treasuries - 50.9% success rate.

FIRECALC - 3.5% WR, 35 Years, 100% 30 Year Treasuries - 41.5% success rate.

If you use the "Investigate changing my allocation" tab entry, you'll find success rates are pretty flat between 40/60 EQ/Fixed and 100/0 EQ/Fixed. Success drops off pretty sharply below 40/60. I consider 'hedging my bets' to stay near the middle of that range ~ 70/30.

-ERD50

I was basing it on the data provided in the link. An 8.3% rate for a FI portfolio vs 9.5% for an all equity portfolio, what is there not to get?

 

[Lsbcal]

I was basing it on the data provided in the link. An 8.3% rate for a FI portfolio vs 9.5% for an all equity portfolio, what is there not to get?

Not sure what link you are referring to.

Part of this may be the definition of FI. If you look at this VG site: https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations
it shows:
100% bonds, return=5.6% (1926 to 2011)
60/40, return = 7.8%
100% equity, return = 9.9%
The bonds here are (I think) intermediate ones, Barclays U.S. Aggregate Bond Index.

"T-bills" refers to near cash Treasuries of much shorter duration. Hence lower returns expected over the long term.

 

[Dawg52]

Not sure what link you are referring to.

Part of this may be the definition of FI. If you look at this VG site: https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations
it shows:
100% bonds, return=5.6% (1926 to 2011)
60/40, return = 7.8%
100% equity, return = 9.9%
The bonds here are (I think) intermediate ones, Barclays U.S. Aggregate Bond Index.

"T-bills" refers to near cash Treasuries of much shorter duration. Hence lower returns expected over the long term.

I quoted rbmrtn originally, therefore I was referring to his link. I also quoted part of the article in the link that my numbers came from. And followed with a wink. Not sure why this is hard to follow.

Reread my post here.... http://www.early-retirement.org/forums/f28/interesting-webpage-on-aa-64234.html#post1262135

 

[Lsbcal]

Sorry Dawg52, I didn't read your original link but rather the link in the OP. The link you reference provides a graph that uses data for 1970 to 2008. One should be careful using this time span because from about 1982 to the present we've been in a historically unprecedented declining rate environment. The all FI portfolio (T-Notes in your link) is then goosed by this.

I just posted an interview link in another thread to a Gus Sauter interview with a very brief discussion of the current expected returns for bonds. Might be worth a read.

 

[Dawg52]

Sorry Dawg52, I didn't read your original link but rather the link in the OP. The link you reference provides a graph that uses data for 1970 to 2008. One should be careful using this time span because from about 1982 to the present we've been in a historically unprecedented declining rate environment. The all FI portfolio (T-Notes in your link) is then goosed by this.

No problem and I agree. The highlighted part is why I winked.

 

[mathjak107]

with a 30 year bull market in fixed income winding down its hard to gauge what you can count on going forward.

like i said previously there is a good chance that retirees will experience their first bear bond market and it may leave many income funds hit pretty hard.

its not happening overnight but it certainly looks like a given within the next couple of years when rates rise.

 

[rbmrtn]

with a 30 year bull market in fixed income winding down its hard to gauge what you can count on going forward.

like i said previously there is a good chance that retirees will experience their first bear bond market and it may leave many income funds hit pretty hard.

its not happening overnight but it certainly looks like a given within the next couple of years when rates rise.

Agree. Have to go with the odds, most likely rates will rise since they are about as low as they can go. There weren't many bond funds around in '70s but the ones that were took a hit on NAV that didn't come back for many years. But they could stay low for a long time, like Japan has been. With rates as low as they are I would almost use CDs as a replacement for bond funds and avoid the risk.

 

[mathjak107]

at these levels bond funds are all about capital gains. rates can even turn negative and keep producing gains.

our bond fund portfolio yield is about 3-4% ,nothing to sneeze at but the real money has been in capital gains.

 

[ERD50]

I was basing it on the data provided in the link. An 8.3% rate for a FI portfolio vs 9.5% for an all equity portfolio, what is there not to get?

Sorry, still not getting it. If you want to go to some un-re-create-able hypothetical, and say: 'If anyone can guarantee the next 38 years to be anything like the previous, give me the T-Bill portfolio for comfort sleeping. I'm closer to the 30/70 model to hedge my bets.'

Heck, if it is guaranteed - why not take the 9.5% over the 8.3%? Over 38 years, that's a big difference, > 1.5x.

But closer to reality (well, actual reality, even if it is past reality) - those FIRECALC runs are pretty clear on the increased failure rates of a high fixed income AA. That means more to me than any single time period.

And if I pick that 1970 starting year in FIRECALC, it only lets you select a 30 year time frame, but the end portfolio is ~ 4.6x with 75% Equities than with 100% fixed. I'd sure feel better prepared for the next 10 or 20 years with a 4.6x sized portfolio. And there are only two years that your buying power dips below your starting portfolio , one ~ 13% below, the other a few hundredths of a percent.

The message is - all this talk about 'sleeping well' with a high fixed income AA just isn't born out by FIRECALC. Anything below ~35% equities has seen more failures. If one just can't stand the volatility of equities, how are they gonna feel about a portfolio failure?

-ERD50

 

[Dawg52]

The message is - all this talk about 'sleeping well' with a high fixed income AA just isn't born out by FIRECALC. Anything below ~35% equities has seen more failures. If one just can't stand the volatility of equities, how are they gonna feel about a portfolio failure?

-ERD50

You don't know everyone's situation. Firecalc shows I have a 100% success rate for a 40 year period using a conservative AA approach, so I'm satisfied. And I'm not even plugging in SS income. I guess I'm lucky enough to have a large enough portfolio to accommodate my modest lifestyle.

If I had to go with a 70/30 AA for FC to give me a 100% success rate, I can assure you I wouldn't have retired early.